AN OVERVIEW OF THE
FRACTIONAL INTEREST
INDUSTRY
Presented by
RICHARD L. RAGATZ, Ph.D.
PRESIDENT, RAGATZ ASSOCIATES
AMDETUR
June 22, 2012
1
THE SPECTRUM OF
RESORT REAL ESTATE
A. Whole-Ownership
1. Traditional second homes, resort condos, etc.
2. Hotel-condominiums
B. Shared-Ownership
1. Resort timeshare
2. Fractional interests*
a.
b.
private residence clubs
destination clubs
C. The “Evolving” Competition
1. Vacation clubs
2. Home Away, AirBnB, OTA, etc.
3. Renting versus owning
*Emphasis of presentation
2
BASIC CHARACTERISTICS OF THE
FRACTIONAL INTEREST CONCEPT
A.
B.
C.
D.
E.
1/15 (three weeks) to 1/4 (three months)
Deeded ownership
Equitable use throughout the year
Floating unit
Appropriate use plan/reservation
system
F. External exchange
3
BASIC CHARACTERISTICS OF THE
FRACTIONAL INTEREST CONCEPT
G. Subsets
1. Private residence clubs (PRC)
a.
b.
c.
d.
2.
higher prices and annual dues
higher quality and more services
prime real estate and lifestyle
different consumer profile and eligibility
Destination clubs (DC)
a.
b.
c.
d.
e.
usually non-equity
30-year membership
refundability
multiple locations
recent trends
4
SHARED-OWNERSHIP, BUT NOT
RESORT TIMESHARE
A. More time, more services, higher quality
product (usually)
B. Higher price, consumer profile and incomeeligibility
C. Real estate ownership rather than vacation
ownership
D. Appreciation (in normal times) rather than
depreciation
E. Higher consumer satisfaction
5
SHARED-OWNERSHIP, BUT NOT
RESORT TIMESHARE
F.
G.
H.
I.
Better public image
More selective external exchange
Less craziness in marketing and sales
More of purchase price to the product
6
MORE RATIONAL INVESTMENT THAN
WHOLE-OWNERSHIP
A. Buy amount of use that fits available vacation time
B. Buy amount of use that fits discretionary income
patterns
C. Not all funds committed to one product and location
D. Higher quality vacation home for less costs
E. Allows for multiple purchases
F. Show up and enjoy
G. More of a true lifestyle product
H. More variety and flexibility via external exchange
7
ADVANTAGES OVER RESORT
TIMESHARE FOR THE DEVELOPER
•
•
•
•
•
•
•
Less complex and disruptive
Normally less need for JV partner
Fewer sales
Better image
Allocations for product costs
<Narrower market>
<No receivables income>
8
ADVANTAGES OVER WHOLEOWNERSHIP FOR THE DEVELOPER
•
•
•
•
•
•
•
Broader market
Higher profit due to mark-up
Higher occupancy rates & ancillary income
Nice complement for cross-selling/mixed-use
<More sales>
<Confusion with timeshare>
<Higher product and operating costs>
9
THE MARK-UP FACTOR
•
•
±1.25 to ±1.6 (recent trends)
Influencing factors
o
o
o
o
o
o
Size of fraction/size of unit
Desirability of location
Whole-ownership prices and availability of
inventory
Quality of product
Extent of services
The name
10
IMPACT OF THE MARK-UP FACTOR
Whole-Ownership
Fractionals
sample unit
3-bed, 1,850 s.f.
3-bed, 1,850 s.f.
cost per s.f. (const.
and FF&E only)
$150
$200
cost per unit
$277,500
$370,000
other product costs
similar
sales price
$647,500 @ $350
$971,250 @ 1.5
operating costs
<$64,750 @ 10%>
<$194,250 @ 20%>
const. costs*
<$277,500>
<$370,000>
$305,250
$407,000
remainder
difference
$101,750, or 33% more
*Not including all other product costs, which are assumed similar.
11
SUMMARY CHARACTERISTICS OF THE
FRACTIONAL INTEREST INDUSTRY
•
•
•
•
•
•
•
•
•
•
•
•
•
± 325 projects in North America
± 65,000 owners
Recent trends in sales performance
Influencing factors and outlook
Average size: 40/50 units
Trend toward mixed use: 58% with W-O; 28% with hotel
74% two- or three-bedrooms (1,400 to 2,000 sq. ft.)
Average size of share: 1/8 (trend toward smaller)
Average price per share: $170,000 ($250,000)
Average price per square foot: $900 ($1,560)
Average weekly maintenance fees: $1,270 ($1,990)
Trend toward fewer extraneous services, but more owner benefits
Expenses: 55% for product; 15% for operating
12
FRACTIONAL INTERESTS IN MEXICO
1.
2.
3.
4.
At least 9 active projects
Sales volume of US $30 million in 2011
Average of $3.3 million
Average:
price per share: $215,000
price per week: $36,500
price per sq. ft.: $755
5. Much larger units
6. Most are within a larger development
13
SOME CURRENT CHALLENGES
Uncertainty of economy
Lack of consumer financing
Decrease in home equity funds
Glut of whole-ownership inventory and
resales
• Increasing competition from rentals and
rental clubs
• Excessive prices and maintenance fees
•
•
•
•
14
CRITERIA FOR SUCCESS
THE LOCATION
•
•
•
•
•
Historical demand for resort real estate
High prices for whole-ownership resort real estate
Higher-end tourist profile and repeat visitation
patterns
Limited seasonality or two lengthy high seasons
Limited competition (at this time)
15
CRITERIA FOR SUCCESS
THE PRODUCT
•
•
•
•
•
Positive name recognition/brand
Size of fraction
Use plan/reservation system
Quality versus space
Price versus dues
16
CRITERIA FOR SUCCESS
THE EXTRAS
•
•
•
•
•
•
•
•
Lifestyle rather than simply brick and mortar
Amenities
Services
Preferred access (ski, golf, spa, etc.)
Exchange and rentals
Resales
The “value” issue
Consumer financing
17
CRITERIA FOR SUCCESS
THE DELIVERY
•
•
•
•
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Lead generation
Proper positioning, i.e., the comparative advantages
The “fine line” in marketing and sales
The experience and sensitivity
The patience and follow-up
The listening ear and consumer hand-holding
Multiple programs
18
SOME SUGGESTIONS
A. Use industry averages for
benchmarking only
B. Don’t simply copy
C. Don’t use a company trying for
your marketing and sales contract
D. Don’t use your attorney
E. Avoid personal ego, love for
property, and wishful thinking
19
SOME SUGGESTIONS
F. Understand industry standards (esp.
operating costs)
G. Understand the critical unique components
of fractionals
1. mark-up ratio
2. use plan/reservation system
3. size of share
4. beyond simple brick and mortar
H. Rely on objectivity, realism, thoroughness,
experience and listening ear
20
SOME SUMMARY COMMENTS
•
•
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•
•
•
•
•
•
Recent market trends
Just tapping the potential
Consumer acceptance and recognition
Positive image
Based on rationality for the consumer and the
developer
One piece of the puzzle
Not a “quick fix”
Proper planning
Welcome to the challenge and opportunities
21